Select Committee on Work and Pensions Written Evidence


Annex C

BENEFIT SIMPLIFICATION PROJECT 2004

Buy-out of transitionally protected Invalidity Benefit cases

  1.  This short note discusses buy-out for former Invalidity Benefit cases that are currently transitionally protected.

BACKGROUND

  2.  Incapacity Benefit was introduced on 13 April 1995 and replaced Sickness Benefit and Invalidity Benefit. Customers entitled to Invalidity Benefit immediately before Incapacity Benefit was introduced were transitionally protected and received Transitional Long-Term Incapacity Benefit which in effect is calculated exactly the same as Invalidity Benefit. However, it is more generous and includes the old age-related Invalidity Allowance and continues to be paid until the customer reaches pension age (60 for a woman and 65 for a man) or until they are no longer incapable of work, whichever is earlier.

  3.  As would be expected, transitionally protected Invalidity Benefit customers are older and, although they are subject to the same medical testing regime as Incapacity Benefit customers, anecdotal evidence suggests that they are less likely to be classified as fit for work or ready to return to work. These customers tend to remain on benefit until they retire and are not required to participate in any type of work focused activity, although in Pathways to Work areas they can participate on a voluntary basis.

AN OVERVIEW OF THE EX-INVALIDITY BENEFIT CASELOAD

  4.  The table below shows how the ex-Invalidity Benefit caseload is changing. The ex-Invalidity Benefit caseload is reduced by approximately 15,000 cases per quarter. However, there could be customers who claimed prior to 1995 who were aged 20 and such people might continue claiming for another 40 years.

Incapacity Benefit recipients by rate of benefit, including long term rate by ex-Invalidity Benefit and others (thousands)


Number of Incapacity Benefit customers
IBLT
Quarter ending
Total
IBST(L)
IBST(H)
Total IBLT
Ex-
IVB1
Other IBLT
Credits only

May
2,316.9
103.8
99.7
1,445.6
1,036.0
409.6
667.8
August
2,301.7
97.9
96.5
1,428.4
990.8
437.5
678.9
November
2,299.7
97.8
91.4
1,415.0
953.3
461.7
695.5
1999
February
2,273.9
98.4
88.0
1,377.7
895.5
482.2
709.8
May
2,277.5
91.6
87.3
1,379.3
871.9
507.4
719.4
August
2,275.3
92.1
87.9
1,361.7
833.4
528.3
733.6
November
2,267.4
93.3
91.4
1,336.1
788.8
547.3
746.5
2000
February
2,259.5
93.8
89.0
1,327.0
758.6
568.3
749.8
May
2,263.2
93.3
90.3
1,320.3
733.2
587.1
759.3
August
2,286.2
93.3
90.8
1,323.0
714.4
608.6
779.1
November
2,310.4
94.1
92.4
1,327.9
697.0
630.9
796.0
2001
February
2,324.4
96.7
92.0
1,330.5
679.4
651.2
805.2
May
2,327.0
97.4
94.2
1,327.8
658.1
669.7
807.5
August
2,337.8
94.1
97.9
1,326.1
639.1
687.0
819.7
November
2,342.9
87.4
99.1
1,324.3
621.1
703.2
832.0
2002
February
2,337.7
88.5
94.2
1,323.1
602.6
720.5
832.0
May
2,365.7
90.0
86.6
1,347.0
586.1
760.9
842.1
August
2,377.0
90.8
89.4
1,341.7
568.5
773.2
855.1
November
2,384.2
91.3
89.3
1,334.9
551.9
783.0
868.7
2003
February
2,387.9
93.2
89.4
1,334.8
536.1
798.8
870.5
May
2,394.2
93.9
88.4
1,333.0
520.8
812.2
878.8
August
2,400.5
87.7
90.5
1,330.6
505.6
825.0
891.7
November
2,409.2
88.0
92.6
1,326.5
492.2
834.3
902.1

Source: Information Centre March 2004


  5.  The table below shows that there are approximately 206,000 customers who are in receipt of Income Support who are also getting long-term Incapacity Benefit (including ex-Invalidity Benefit cases). On average, customers who receive ex-Invalidity Benefit are paid about £20 more per week than new Incapacity Benefit cases. Therefore, it is likely that they would form a much smaller proportion of the 206,000 Income Support recipients than their share of the overall Incapacity Benefit load might indicate.

Income Support customers with income taken into account or disregarded, by number and type of items: November 2003 (in thousands)



Department's pensions and benefits
Items into account (000's)
Items disregarded (000's)

Incapacity benefit—short term (low)
31
Incapacity benefit—short term (high)
14
Incapacity benefit—long term
206
Severe Disablement Allowance
193
Attendance Allowance
Nil (over 60)
Disability Living Allowance care component
476
Disability Living Allowance mobility component
517

Source: Information Centre March 2004

Average payments of long-term Incapacity Benefit in comparison with ex-Invalidity Benefit

Incapacity Benefit long-term rate
£78.81
Invalidity Benefit
£98.63

Source: Information Centre March 2004


OPTIONS

  6.  There are several options for the Project to consider.

    —  Leaving those who are entitled and in receipt of Invalidity Benefit until they retire or are no longer incapable of work. The "do nothing" option.

    —  Buy-out transitional protection with a lump sum payment that would be actuarially calculated depending on age of the client and the amount of Invalidity Benefit received and replace with long-term Incapacity Benefit.

    —  Freezing all amounts of Invalidity Benefit for a fixed number of years (for example 2 years), buy-out transitional protection and then replace all Invalidity Benefit rates with the Long-Term rate of Incapacity Benefit.

    —  Freeze individual rates of Invalidity Benefit and replace with Incapacity Benefit when Incapacity Benefit rates equalise with Invalidity Benefit, on a one by one basis. This is a "marked time" approach to phasing out Invalidity Benefit.

IMPLICATIONS


No
Description
Implications

1Leaving those who are entitled and in receipt of Invalidity Benefit until they retire or are no longer incapable ofwork. Pros:
—  Allows the issue to gradually phase out
—  No losers
Cons:

—  Continue to run two complex contributory systems side by side, requiring staff to be trained in old rules that apply to Invalidity Benefit
—  Continues to be unfair to the more recent claimants of Incapacity Benefit as the old Invalidity Benefit rates remain more generous than Incapacity Benefit
—  Disincentive to consider work as an option as rates of benefit are generous and continue to be uprated
2Buy-out transitional protection and replace with the higher long-term Incapacity Benefit, current the basic rate is £72.15 (excluding age additions). Pros:
—  Would hugely simplify the system of contributory benefits for the incapacitated

—  Negate the need to administer two systems at the local level
—  A one-off lump sum payment may enable some clients to consider a move into work and the reduction in benefit may have a work incentive effect
—  Equalises the disparity between the old more generous Invalidity Benefit and the new Incapacity Benefit rates—could be considered a fairer system
Cons:
—  Costly (£2.5 bn)
—  Some customers might become entitled to Income Support top-up.
—  May be difficult presentational issues. These customers had been promised ongoing protection so will not expect their entitlement to Invalidity Benefit to change
—  Possible European Convention of Human Rights issues to be explored.

—  May influence negative behaviour ie those whose partners work part-time may choose to stop working so as to claim Incapacity Benefit/Income Support where entitlement may newly arise with a reduction of Invalidity Benefit
3Freezing all the amounts of Invalidity Benefit for x years (eg 2 years), and then buy out all clients and replace all Invalidity Benefit clients with the Long-Term rate of Incapacity Benefit Pros:
—  This is a more traditional way of treating transitionally protected cases so customers may be more used to this type of approach

—  Would simplify system after 2 years

—Would give customers a specific time to adjust and come to terms with the change

Cons:
—  Less costly than option 2
—  The complexities would remain for a further 2 years

—  Possible European Convention of Human Rights issues?  Loss in real terms for those with frozen Invalidity Benefit
—  Could float people onto Income Support.
4Freezing individual rates of Invalidity Benefit and replacing with Incapacity Benefit when Incapacity Benefit rates equalise with Invalidity Benefit, on a one by one basis. Pros:
This is the most traditional way of treating transitionally protected cases

Cons:

Might be presentationally difficult as customers with Transitional Protection might feel that they were being cheated of their uprated additional pension, (ie a legal possession)
—  Would take a long time to convert the entire caseload and would involve a high level of clerical involvement ie each case would need to be assessed on an individual basis
Losers in real terms

COSTS

  7.  There are 5 elements to the difference between Invalidity Benefit and Incapacity Benefit. They are as follows:

  (i)  The Basic Rate—This is identical for Invalidity Benefit and Incapacity Benefit, so nothing needs changing.

  (ii)  Additional Pension—Those on Incapacity Benefit have no Additional Pension. For those on Invalidity Benefit, the Additional Pension has been frozen. Over the life time of the benefit expenditure will be around £2.3 billion.

  (iii)  Child Dependency Increases (£11.35 pw)—These are the same in Invalidity Benefit, as they are on Incapacity Benefit. They are equivalent to the Child Tax Credit (but slightly larger—Child Tax Credit is £10.45). If the Child Dependency Increase is frozen, then the Child Tax Credit would reach the Child Dependency Increase level in about 5 years and then you can force everyone to move to Child Tax Credit at no extra cost to us or loss to customers. Currently, new Incapacity Benefit customers have to go straight to Child Tax Credit.

  (iv)  Adult Dependency Additions (£30-£40 ish per week)—If we individualise the benefit system, this will get lost anyway. This has not been costed as the figures are the same for Invalidity Benefit and Incapacity Benefit.

  (v)  Age Additions—At 3 rates for Invalidity Benefit, and 2 rates for Incapacity Benefit. The difference between the two costs around £16m this year. Difference until 2030 adds to around £150 million.

COSTINGS FOR VARIOUS OPTIONS

  8.  Work has already been done by the Tax Credit team on costings for abolishing all Child Dependency Increases in all benefits. However, in Incapacity Benefit/ Invalidity Benefit this would cost around £550 million projected forward to 2030 (if current trend continues). However, everyone could be transferred to Child Tax Credits when they reach the same level. In this case, only the 5-year costs would need to be considered which comes to around £260 million. Buying out Adult Dependency Increases has not been costed but would be small compared to other elements.



Option No
Description
Cost
(£)
Comment

1
No Change
Nil
2Buy-out transitional protection with a lump sum payment that would be actuarially calculated depending on age and the amount of Invalidity Benefit received and replace with long-term Incapacity Benefit
2.5 bn
£2.5 bn = £2.3bn (additional pension) + up to £150m (age addition) + (Adult dependency Increases, Child Dependency Increases). This is equivalent to an average one-off payment of £5,000 to each Invalidity Benefit customer
3Freezing all amounts of Invalidity Benefit for a fixed number of years (for example 2 years). After the 2 years buy-out the Invalidity Benefit with a lump sum payment and replace all Invalidity Benefit rates with the Long-Term rate of Incapacity Benefit.
1.7 bn
This will result in an average one-off payment of £4,000 after 2 years
4Freeze individual rates of Invalidity Benefit and replace with Incapacity Benefit when I Incapacity Benefit rates equalise with Invalidity Benefit, on a one by one basis. This is a "marked time" approach to phasing out Invalidity Benefit
Nil

Source: Information Centre & BFMD forecasts (with adjustments)


  Notes

  1.  492,200 Invalidity Benefit customers affected

  2.  We have calculated future additional expenditure on Invalidity Benefit cases (as opposed to if individuals were on Incapacity Benefit) as: Expenditure = (difference in average amount) x (average number of years) x (Invalidity Benefit caseload). We have used projected forecasts (with some adjustments made by Bella) of additional pension alone in ex-Invalidity Benefit for the next 10 years, reaching a figure of £2.1 billion.

  3.  Some costings are not currently consistent with other costings which take other factors into account (ie: Income Support receipt).

Family Employment Division

WACG

June 2004

How many people work in the Benefit Simplification Unit?

    —  The Unit has a complement of 4 staff, one Senior Executive Officer and three Higher Executive Officers.

    —  It is supported by some additional input from a Senior Civil Servant and a Grade 7.

    —  A secondee from the Citizens Advice Bureau also worked on the Unit from June 2006 to March 2007.

  The five staff mentioned in the June 2006 PQ included the secondee from Citizens Advice.

What are the running costs of the Benefit Simplification Unit?

    —  There were no specific set up costs as permanent staff were drawn from within the Department.

    —  Total running costs from when the Unit was set up in January 2006 until the end of the last financial year at March 2007 were £348,735.

DWP

June 2007





 
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